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Alibaba Unveils Wall of Shame for Deadbeat Borrowers

For several years now Alibaba Group Holding Ltd. has been making billions of dollars of loans to the small merchants that use its services.

Without demanding collateral, the company has for the most part made use of its massive data records of would-be borrower behavior to determine who to give how much. But earlier this month, Alibaba deployed a weapon of a different sort to encourage borrowers to pay back their loans: a wall of shame.

On July 1, the company released a list of more than 100 vendors who recently failed to pay back loans on its Taobao forum site with details including the vendors’ identification numbers and full names. Below the list is a link to a site, which the company said has been running since 2010, that has a complete list of borrowers Alibaba said has broken loan agreements with the company along with the amounts each owes. If borrowers pays back their loans, their names are removed from the list, according to the company.

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A screenshot taken July 12 shows Alibaba’s list of vendors who have recently failed to repay loans on time.

Given the lack of transparency about nonperforming loans in China, in some ways the list could be seen as a gesture toward transparency. The list is also a reminder of how underdeveloped access to formal loans is for smaller businesses in China, where loans are typically extended only to the largest and most well-connected companies. As Alibaba increasingly pushes to extend financial services to its customers, who are a blend of under-banked and savvy serial entrepreneurs, it is in part forced to teach the ins and outs of the services it is providing.

One recent misunderstanding in Guangxi shows just how unaware many in China are of just how credit works in a country where credit cards are rare: When a local branch of the central bank began distributing credit reports to customers, rumors quickly spread that it was in fact giving good ratings that would help would-be borrowers secure interest-free loans. That created a rush of applications, with more than 10,000 applying for credit ratings and drew crowds to the bank. To disperse the crowds the bank said it stopped taking applications for loans.

Though the highly public nature of Alibaba’s black list would seem likely to give pause to, if not outright scare, would-be borrowers, the vast majority of commenters on the list voiced approval of the practice. Many pasted grinning emoticons giving a thumbs up beneath the list. It remains to be seen if Taobao users will change their mind as credit lending becomes more common in China.

An Alibaba spokeswoman said the company does its best to help borrowers repay loans, and said that the site is meant to serve as a means of educating its online vendor community about the importance of credit.

A message above the posting avers that “credit equals wealth” and reminds users that releasing the names of users who have not paid back loans is okay according to its rules. It also says that more than 99% of borrowers have paid back loans before closing by saying: “Today’s publicity is to ensure that in the future it won’t be necessary to publish another inglorious list. Let’s all work together!”

Alibaba has said it hopes to expand its loan regime in the coming years. To that end it was given a boost earlier this week when the Shenzhen stock exchange said the company could tap investors directly to finance its loans via a series of products that will float on the exchange.

Over the past three years the company has distributed more than 100 billion yuan in loans despite an average loan value of 40,000 yuan. The average length of Alibaba’s loans is 123 days while non-performing loans amount to just 0.87% of total loans distributed as of the second quarter, according to the company.

The prospect of having one’s name on a list of shame on one of China’s most popular websites might just pare it down further a few tenths of a percentage point. If it does Alibaba might just coin a new version of an old adage: beware of borrowing money from someone who buys servers by the rack.